Gelband, Joseph F.. Taxing subject: We're from the government... . Chicopee: Barron's, 25 de outubro de 1999.
Taxing subject: We're from the government...
Barron's; Chicopee; Oct 25, 1999; Joseph F Gelband;
Abstract:
More than a few co-operative apartments dwellers, frustrated by arbitrary decisions of their co-op associations' boards, will be grateful to the IRS for showing them how to transfer their apartments to "qualified personal residence trusts," as a way to reduce their estate taxes, regardless of the board's approval. The QPRT strategy is directed at the Tax Code rule that pulls back into your estate property you may have given away but in which you reserved an interest, such as the right to enjoy it or its income, for any period - unless you outlive that period. The game plan is designed to give you a shot at removing your home from your estate at minimal gift-tax cost, while reserving your right to enjoy it.
Copyright Dow Jones & Company Inc Oct 25, 1999
[Headnote]
How the IRS can help you get around a co-op board
MORE THAN A FEW CO-OPERAtive-apartment dwellers, frustrated by arbitrary decisions of their co-op associations' boards, will be grateful to the Internal Revenue Service for showing them how to transfer their apartments to "qualified personal residence trusts," or QPRTs, as a way to reduce their estate taxes, regardless of the board's approval.
The QPRT strategy is directed at the Tax Code rule that pulls back into your estate (for tax purposes) property you may have given away but in which you reserved an interest, such as the right to enjoy it or its income, for any period - unless you outlive that period. The game plan, an end run around that rule, is designed to give you a shot at removing your home (your "personal residence") from your estate at minimal gift-tax cost, while reserving your right to enjoy it. So suppose you transfer your home to a trust that allows you the use of it for the next, say, 10 years, after which it. belongs to your child; the property is out of your estate, but only if you're alive at the end of the lOth year.
Of course, you'll have to file a gift-tax return for the year you transfer the home, but that can be done on the cheap. The tax is computed on the full value of the property less a discount for the time value of the period you reserved. (The interest rate at which the discount is figured, set from time to time by the IRS, currently ranges about 7%.) In other words, the present value of the gift - that is, what you give the child today but scheduled to take effect, say, 10 years from now - would be cut down to about half the full value of the home, with a comparable reduction in the gift tax.
Another bonus, if you can hang in past the end of the term, not to be overlooked in this era of soaring property values (and estate taxes that rise steeply to 55%), is that any appreciation in value of the home after you transfer it to the trust will go free of gift as well as estate taxes; its value is frozen as at that date. To be sure, the child, taking your own tax basis for the home, will lose the advantage of the higher (date-of-death value) basis he would have if it came via your estate; but with the capital-gains tax at a maximum 20% (and delayed until the home is sold) and the $250,000 exemption ($500,000 for a married couple) for gains on home sales, that's seldom an important consideration.
It can add up to some very serious tax savings. Sure, it's a gamble - a bet on your life span - but you set the odds: By reserving a longer period for your use, you lower the tax cost of the transfer, but also your chances of surviving the term. Still, if you don't make it, any gift tax you paid will be credited against the estate tax, and no more than the cost of the trust arrangement would have been lost. With any luck, however, you will outlive the term, and the substantially reduced gift tax will cover the entire tax cost of transferring the property. Moreover, you may not even have to advance the tax - you could apply your $650,000 lifetime exemption against the gift and retain the use of that money.
Well, if it's that attractive and respectable a tax dodge; why are we talking about your residence when so much more of your estate will be in your securities portfolio? That window was closed in 1990 - with certain exceptions, including QPRTs, no time-value discounts are allowed in valuing gifts to your descendants or their spouses. The QPRT approach, notwithstanding calls by the President for its repeal, is still alive and well, and one of the few remaining effective estate-planning tools.
Back to your co-op, of which you own the proprietary lease and the related stock of the housing corporation (the Tax Code qualifies that as your residence). Suppose you have decided to go for the QPRT, and having had an appropriate trust prepared, you find that the board of the co-op association, whose consent you need, will not approve the transfer of your shares and lease to the trust. Don't let it stop you - that's now a paper roadblock you can bypass.
It didn't stop one feisty taxpayer, who (to quote the IRS) "intended to transfer the legal title to the shares and lease to the Trust, but the co-op association ... disapproved her request to do so. For this reason, Taxpayer instead transferred beneficial title to the shares and lease to the Trust and continues to hold legal title as a nominee." The IRS, in a letter ruling released June 25, held that her transfer qualified as a QPRT. (Ownership of property is often split into separate parts. In a trust for your child, for example, the trustee holds the legal title to the trust assets, while the child has the beneficial interest. Similarly, the securities in your brokerage account are registered in the name of a professional nominee who holds the legal title while you are the beneficial owner. It's just a legal concept, but then so is "ownership" itself.)
Go thou and do likewise? It shouldn't be necessary. Predictably, once made aware of the ruling, the board will likely see the light, and you won't have to rub their noses in it.
[Author note]
JOSEPH F. GELBAND is a tax lawyer in Larchmont, New York.